Bank of America climbs on plan to sell China stake

SAN FRANCISCO (MarketWatch) — Bank of America said Monday it plans to sell 13.1 billion shares of China Construction Bank in another move to bolster capital on its balance sheet, an issue that’s been dogging the nation’s largest bank this summer.

The deal, slated to close in the third quarter, is expected to raise $8.3 billion in cash. Bank of America BAC +5.03%  will retain a 5% stake in the Chinese bank CICHY +2.20%  after the transaction.

“This sale of approximately half of our shares of CCB stock is expected to generate about $3.5 billion in additional Tier 1 common capital and reduce our risk-weighted assets by $7.3 billion under Basel I,” said Chief Financial Officer Bruce Thompson in a statement.

Bank of America shares surged 5% to $8.13 in mid-morning trades Monday, making it the top gainer among major U.S. bank stocks.

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Markets Rally after Hurricane Irene

There are thin trading volumes due to late summer vacations and people staying after hurricane Irene, but the markets opened with a rally. Steven Russolillo and Michael Casey explain the market moods on Markets Hub. (Photo: Reuters.)

Better yet, the Chinese bank stock sale, which many investors had figured would eventually happen, follows on the $5 billion investment Bank of America got from Warren Buffett’s Berkshire Hathaway BRK.A +3.00%   BRK.B +3.02%  on Thursday. Read about Buffett’s $5 billion investment in Bank of America.

This is calming jittery investors who had been selling Bank of America’s stock in droves from the end of July through mid-August. Shares of the Dow component have jumped more than 35% since Tuesday, when they hit a 52-week low of $6.01.

The three other financial stocks on the Dow Jones Industrial Average — J.P. Morgan Chase JPM +2.73% , American Express Co. AXP +0.39%  , and Travelers Inc. TRV +4.85%  — all traded higher.

On Monday morning, the financial sector was the top industry gainer on the S&P 500 SPX +2.09% . The Financial Select SPDR ETF XLF +3.21% , which tracks financial companies on the S&P, advanced 2.9% to $13.14. The KBW Bank Index BKX +3.17%  , which consists of the nation’s 24 leading banks, moved up 2.9%.

Citigroup Inc. C +3.85%  rose nearly 4%, Goldman Sachs Group Inc. GS +2.93%  gained 2.9%, and Wells Fargo WFC +2.56%  rose 2%.

Post-Irene insurer shares surge

After Hurricane Irene passed over the East Coast with less damage than anticipated, insurers turned out to be one of the strongest subsectors on the S&P 500. Hartford Financial Services Group Inc. HIG +10.44%  led the charge with shares up more than 9%.

Shares of Allstate Corp. ALL +6.08%  , XL Group PLC XL +6.59%  , Lincoln National Corp. LNC +6.53%  , Genworth Financial Inc. GNW +6.14%   and MetLife Inc. MET +5.59%   all traded 5% or higher.

Why Gold Might Hit $5,000 Within Two Months

My firm has written often over the past couple of months comparing historical price movements with current developments.

To show you a few:

• Gold Headed To $5,000 per Ounce?
• Silver 2006 vs Silver Today, Does It Look Familiar?
• USD-JPY: Let The Crash Begin

To make the comparisons easier, I developed an indicator for the Prorealtime Charting software, which allows me to “go back in time”.

The first article showed us that it’s possible that gold could explode towards $5,000 over the next couple of months. Let’s have a look at the chart. (All charts created with Prorealtime.)


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But since anything is possible, let's look at this further: What could cause gold to explode?

Think about a total loss of confidence in currencies, especially the US Dollar.

As the second graph (below) shows, the US dollar is headed for a crash against the JPY. We have already seen part of that crash, but then suddenly the Bank of Japan intervened and the price shot up. However, interventions don’t work (except for the very short term) in our opinion, and right now, the USDJPY is already back around its lows, despite the interventions.


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So yes, gold could explode to $5,000. Especially if we would get a complete loss of confidence in the US dollar.

However, when you cross the street, you don’t just look at one side if a big truck is coming. The same goes for investing. One should always consider different views. Therefore, we compared the gold price today with the price movement of early 2006 to early 2008 in the chart below:


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We all know what happened with gold in 2008. It dropped from as high as $1,033 to as low as $681, as all assets were liquidated in order to obtain cash. We were experiencing a really big credit crunch.

As gold and stocks sold off in 2008, gold stocks were hit even harder than gold. If the comparison of gold now vs. 2008 would hold, then what should we expect from gold stocks? Well, the chart below has the answer.


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What would happen to silver? Exactly. The same as in 2008: a huge sell-off.


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Now I can already hear you say, “Hey, what about stocks?”

Yes dear readers, stocks also follow a similar pattern, as shown by the price action of the German DAX index.


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One last thought: Why is Mr. Paulson’s biggest holding the SPDR Gold ETF (GLD)? He doesn’t own that many gold stocks, but still, he is uberbullish about gold. If he really thinks gold will trade at $4,000, then why doesn’t he load up on gold mining stocks?

Maybe he thinks gold and gold stocks will completely disconnect, with gold going through the roof, while gold stocks tank just like the general markets? That trend might have already been developing over the last couple of months, as gold is at an all-time high, while gold stocks are still trading at levels where gold was trading about $500 lower.